Search

MEGA Brands Reports Second Quarter 2007 Financial Results

MONTREAL, Aug. 9 /CNW Telbec/ - MEGA Brands Inc. (TSX: MB) announced its
financial results today for the second quarter and first six months ended June
30, 2007. All figures are expressed in US dollars.
-------------------------------------------------------------------------
Financial Highlights
Three-month periods Six-month periods
ended June 30, ended June 30,
(US $ millions, except
earnings per share) 2007 2006 2007 2006
-------------------------------------------------------------------------
(unaudited)
Net sales 121.5 102.2 211.6 180.8
Product line segmentation
Toys 57.9 41.5 112.1 84.0
Stationery &amp; Activities 63.6 60.7 99.5 96.7
Geographic segmentation
North America 87.1 79.3 153.3 139.0
International 34.3 22.9 58.3 41.7
Net earnings (loss) 4.0 4.1 (19.9) 4.6
Earnings (loss) per share
Basic 0.12 0.13 (0.61) 0.14
Diluted(1) 0.12 0.12 (0.61) 0.14
(1) The dilutive effect of outstanding options under the treasury stock
method for the six-month period ended June 30, 2007 is nil as it is
anti-dilutive.
-------------------------------------------------------------------------
"We are pleased to report strong sales growth with an increase of 19% to
$121.5 million. Toy sales were up 40% to $57.9 million on higher demand across
all categories - preschool, boys 5+, Magnetix and games &amp; puzzles," stated
Marc Bertrand, President and CEO of MEGA Brands. "On a geographical basis,
North American sales were up 10% to $87.1 million with growth in all toy
categories and in Stationery and Activities. International sales increased by
50% to $34.3 million, driven by very strong demand for construction toys."
"The strong top line growth in the first half of 2007 demonstrates that we
have great innovation and the right licenses. These are the fundamentals of
our business and they provide a solid foundation for our growth and
profitability," added Bertrand.
Performance for the three-month and six-month periods ended June 30, 2007
Net sales in the second quarter of 2007 increased 18.9% to $121.5 million
compared to $102.2 million in the corresponding period last year. Higher net
sales are mainly related to strong demand from retailers for our Toys product
lines.
Net sales of our Toys product lines in the second quarter of 2007
increased 39.5% to $57.9 million compared to $41.5 million in the second
quarter of 2006. This growth was mainly driven by construction toys, with
higher sales in all of our principal brands in the preschool category, and of
theme toys based on two major theatrical releases, Disney's "Pirates of the
Caribbean: At World's End" and Marvel's "Spider-Man 3" in the boys 5-plus
category. Sales of MAGNETIX products also contributed to the sales growth
during the quarter, mainly because the prior year's sales were lower as a
result of shipment delays caused by design and packaging changes initiated by
the Corporation during the second quarter of 2006.
Net sales of Stationery and Activities product lines in the second quarter
of 2007 increased by 4.8% to $63.6 million compared to $60.7 million in the
corresponding period last year. Higher stationery sales were offset by lower
sales of activity products.
On a geographical basis, net sales in North America increased 9.8% to
$87.1 million compared to $79.3 million in the second quarter of 2006.
International net sales in the second quarter of 2007 were up 49.8% to
$34.3 million compared to $22.9 million in the corresponding period of last
year. Growth in both geographic segments was driven by construction toy sales
in the preschool and boys 5-plus categories as well as by stationery products.
International net sales accounted for 28.2% of consolidated net sales in the
second quarter of 2007 compared to 22.4% for the corresponding period for the
prior year.
For the six-month period ended June 30, 2007, net sales increased 17.0% to
$211.6 million compared to $180.8 million in the same period last year. Sales
of Toys were up 33.5% to $112.1 million compared to $84.0 million in the first
six months of 2006 based on strong sales in the preschool category and on
theme toys based on the two major theatrical releases mentioned above in the
boys 5-plus category. Sales of MAGNETIX products for the six-month period
ended June 30, 2007 were lower than the prior year. However, the brand remains
strong with stable retail sales worldwide. Sales of Stationery and Activities
for the first six months of 2007 increased by 2.9% to $99.5 million compared
to $96.7 million for the corresponding period of the prior year. North
American sales reached $153.3 million for the first six months of 2007
compared to $139.0 million in the corresponding 2006 period, while
International sales increased to $58.3 million or 27.6% of total net sales,
compared to $41.7 million or 23.1% of total net sales in the first half of
2006 due to solid growth in both the Toys and Stationery and Activities
product lines.
Cost of sales increased to $74.2 million in the second quarter of 2007
compared to $60.0 million in the corresponding period of 2006. For the
six-month period ended June 30, 2007, cost of sales increased to $155.0
million compared to $104.3 million for the same period in 2006. For the
purpose of financial statement presentation, MAGNETIX product recall and other
charges of $30.5 million are included in cost of sales for the six-month
period ended June 30, 2007 ($0.3 million in 2006).
Gross profit in the second quarter of 2007 increased to $47.3 million
compared to $42.2 million in the second quarter of 2006. The gross margin
declined to 38.9% in the second quarter compared to 41.3% in the second
quarter of last year due mainly to sales of excess inventory and higher magnet
costs. Plastic resin prices in the second quarter of 2007 were in line with
the corresponding period last year.
For the six-month period ended June 30, 2007, gross profit was
$56.6 million compared to $76.4 million for the same period in 2006. Excluding
MAGNETIX product recall and other charges of $30.5 million, gross margin was
41.2% compared to 42.3% in the first half of last year.
Marketing and advertising expenses increased to $4.5 million in the second
quarter of 2007 compared to $3.8 million in the second quarter of 2006. This
increased investment in our brands reflects the timing of new product releases
in 2007 compared to the second quarter of 2006. For the six months ended June
30, 2007, marketing and advertising expenses increased to $10.8 million
compared to $8.1 million for the corresponding period of the prior year, again
mainly due to timing of new product releases.
Research and development expenses increased to $6.4 million in the second
quarter of 2007 compared to $4.2 million in the corresponding period last
year. This increase is mainly related to expenses to support new product
initiatives, some of which have occurred earlier this year compared to the
prior year due to the timing of new product launches. For the six months ended
June 30, 2007, research and development expenses increased to $11.7 million
compared to $7.4 million for the corresponding period of the prior year again
due mainly to the timing of new product launches.
Other selling, distribution and administrative expenses amounted to
$28.2 million in the second quarter of 2007 compared to $24.9 million in the
second quarter of 2006. This increase mainly reflects higher distribution
expenses resulting from sales growth in international markets. For the six
months ended June 30, 2007, other selling, distribution and administrative
expenses increased to $56.3 million compared to $48.2 million for the
corresponding period of the prior year, mainly to support our sales growth.
As a result of the above, earnings from operations were $8.7 million for
the second quarter of 2007 compared to $10.3 million in the corresponding 2006
period. In North America, earnings from operations for the second quarter of
2007 were $2.8 million compared to $1.8 million last year. International
earnings from operations were $5.9 million compared to $8.5 million in the
second quarter of 2006.
For the six-month period ended June 30, 2007, the loss from operations was
$26.7 million compared to an operating profit of $14.4 million in the
corresponding period of 2006. This amount includes the MAGNETIX product recall
and other charges and litigation expenses of $36.5 million, net of the
recovery of $1.0 million in product liability settlement from our insurers.
The loss from operations in North America amounted to $33.3 million compared
to earnings from operations of $6.7 million in the prior year while earnings
from operations in the International market amounted to $6.6 million compared
to $7.7 million in the same period of the prior year.
Interest and other expenses in the second quarter of 2007 were
$6.7 million compared to $5.2 million in the same 2006 period, reflecting
mainly an increase in average long-term debt and, to a lesser extent, higher
interest rates. For the six months ended June 30, 2007, interest and other
expenses amounted to $12.8 million compared to $10.3 million in the prior
year, also reflecting the increase in average long-term debt and, to a lesser
extent, higher interest rates.
Income taxes for the second quarter ended June 30, 2007 amounted to a
recovery of $1.9 million, compared to an expense of $1.1 million in the
corresponding period of the prior year. Reflecting the MAGNETIX product recall
and other charges for the six months ended June 30, 2007, the income tax
recovery was $19.5 million compared to $0.5 million in the prior year. The tax
rate used to establish the income tax expense for the quarterly results is the
applicable estimated effective rate of each entity of the group. The effective
tax rate reflects the Corporation's structure for tax purposes as well as the
financing structure put in place following the acquisition of MEGA Brands
America.
Net earnings amounted to $4.0 million or $0.12 diluted earnings per share
in the second quarter of 2007 compared to net earnings of $4.1 million or
$0.12 diluted earnings per share for the corresponding period last year.
For the six months ended June 30, 2007, the net loss amounted to
$19.9 million, or $0.61 per diluted share compared to net earnings of
$4.6 million, or $0.14 per diluted share for the corresponding period of the
prior year. Excluding the impact of MAGNETIX product recall and other charges
and litigation expenses totaling $22.8 million after income taxes or
$0.66 diluted earnings per share, the net earnings for the six-month period
ended June 30, 2007 were $2.9 million or $0.08 per diluted share. This
compares to net earnings of $6.1 million or $0.18 diluted earnings per share
excluding the impact of MAGNETIX product recall and other charges in the
corresponding period last year. Please refer to the "Non-GAAP Financial
Measures" section of this press release.
Non-GAAP Financial Measures
The terms "impact of MAGNETIX product recalls and other charges and
litigation expenses", "net earnings (loss) excluding the impact of MAGNETIX
product recalls and other charges and litigation expenses" and "diluted
earnings (loss) per share excluding the impact of MAGNETIX product recalls and
other charges" do not have any standardized meaning under GAAP and are
therefore unlikely to be comparable to similar measures presented by other
companies. We present this information as a measure of operating performance
of our ongoing business without the effects of unusual items. We exclude such
items because they affect the comparability of our financial results between
periods and could potentially distort the analysis of trends in business
performance.
MD&amp;A Filing
MEGA Brands will file its second quarter 2007 Management's Discussion and
Analysis, as well as its unaudited consolidated financial statements and notes
for the second quarter ended June 30, 2007 via SEDAR on August 9, 2007. The
MD&amp;A, financial statements and notes will be available on the Corporation's
Web site as of 7:00 a.m. on August 9, 2007.
Conference Call
An analyst conference call will be held at 9:00 a.m. on August 9, 2007 to
discuss the second quarter results. Participants may listen to the call by
dialling 1 (800) 814-4860. For those unable to participate, a replay will be
available until August 16, 2007. The replay phone number is (416) 640-1917,
access code 21241645#. A webcast is also available at www.megabrands.com under
the investor relations section.
Forward-looking Statements
All statements in this press release that do not directly and exclusively
relate to historical facts constitute "forward-looking statements". These
statements represent the Corporation's intentions, plans, expectations and
beliefs. In certain instances, these statements require us to make assumptions
and there is significant risk that these assumptions may not be correct.
Furthermore, these statements are subject to risks, uncertainties and other
factors, many of which are beyond the Corporation's control. These factors
include and are not restricted to: realization of synergies, litigation and
its inherent uncertainty, including the recovery of the full product liability
settlement amount and risks associated with product recalls, international
operations, insurance coverage, difficulty in predicting consumer preferences
and development and acceptance of new products, rate of growth or
profitability, dependence on a few large customers, fluctuations in the price
of plastic resins and other raw materials as well as currency rates,
seasonality of toy and stationery industries, risks related to licensed
products, retail environment, construction toy litigation and financing and
interest rate matters. The words "believe", "estimate", "expect", "intend",
"anticipate", "foresee", "plan", and similar expressions and variations
thereof, identify certain of such forward-looking statements, which speak only
as of the date on which they are made. The Corporation disclaims any intention
or obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, other than
as required by applicable legislation. Readers are cautioned not to place
undue reliance on these forward-looking statements. More information about the
risks that could cause our actual results to significantly differ from our
current expectations can be found in the "Risks and Uncertainties" section of
our 2006 and second quarter 2007 MD&amp;A.
About MEGA Brands
MEGA Brands is a trusted family of leading global brands in construction
toys, games &amp; puzzles, arts &amp; crafts and stationery. We offer engaging
creative experiences for children and families through innovative,
well-designed, affordable and high-quality products that deliver on our
Creativity to the Rescue promise. For more information, please visit
http://www.megabrands.com.
The MEGA logo, Creativity to the Rescue, MEGA BLOKS, ROSE ART, MAGNETIX
and BOARD DUDES are trademarks of MEGA Brands Inc. or its affiliates.
Consolidated statements of earnings
(in thousands of US dollars, except per share data)
(Unaudited)
Three-month periods Six-month periods
ended June 30, ended June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Net sales 121,486 102,200 211,592 180,764
-------------------------------------------------------------------------
Cost of sales(1) 74,196 59,954 154,951 104,319
-------------------------------------------------------------------------
Gross profit 47,290 42,246 56,641 76,445
Marketing and advertising
expenses 4,464 3,844 10,771 8,068
Research and development
expenses 6,428 4,168 11,685 7,397
Other selling, distribution
and administrative expenses 28,246 24,879 56,298 48,184
Voluntary product recall and
replacement - 755 4,700 1,434
Litigation expenses 1,501 422 2,313 422
Product liability settlement
and related (1,000) 168 (1,000) 168
Gain on foreign currency
translation (1,027) (2,295) (1,458) (3,584)
-------------------------------------------------------------------------
Earnings (loss) from
operations 8,678 10,305 (26,668) 14,356
-------------------------------------------------------------------------
Interest expense
Interest on long-term debt 6,502 4,980 12,549 9,981
Amortization of deferred
financing costs 122 143 292 308
Other interest 40 56 (54) (23)
-------------------------------------------------------------------------
6,664 5,179 12,787 10,266
-------------------------------------------------------------------------
Earnings (loss) before income
taxes 2,014 5,126 (39,455) 4,090
-------------------------------------------------------------------------
Income taxes
Current (342) (3,149) (1,768) (7,199)
Future (1,606) 4,225 (17,739) 6,661
-------------------------------------------------------------------------
(1,948) 1,076 (19,507) (538)
-------------------------------------------------------------------------
Net earnings (loss) 3,962 4,050 (19,948) 4,628
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Earnings (loss) per share
Basic 0.12 0.13 (0.61) 0.14
Diluted(2) 0.12 0.12 (0.61) 0.14
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) Cost of sales for the six months ended June 30, 2007 includes
$30.5 million related to the expanded MAGNETIX product recall and
other charges.
(2) The dilutive effect of outstanding options under the treasury stock
method for the six-month period ended June 30, 2007 is nil as it is
anti-dilutive
Consolidated statements of retained earnings (deficit)
(in thousands of US dollars)
(Unaudited)
Three-month periods Six-month periods
ended June 30, ended June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Balance, beginning of period (11,274) (12,134) 12,636 (12,712)
Net earnings (loss) 3,962 4,050 (19,948) 4,628
-------------------------------------------------------------------------
Balance, end of period (7,312) (8,084) (7,312) (8,084)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated statements of comprehensive income and
Accumulated other comprehensive income
(in thousands of US dollars)
(Unaudited)
Three-month periods Six-month periods
ended June 30, ended June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Net earnings (loss) for the period 3,962 4,050 (19,948) 4,628
-------------------------------------------------------------------------
Other comprehensive income,
net of income taxes
Gain on derivatives designated
as cash flow hedges 1,915 - 1,399 -
-------------------------------------------------------------------------
Comprehensive income (loss)
for the period 5,877 4,050 (18,549) 4,628
-------------------------------------------------------------------------
Accumulated other comprehensive
income
Balance, beginning of period 1,235 - - -
Impact of adopting the new
accounting policy regarding
financial instruments, net
of income taxes - - 1,751 -
Other comprehensive income,
net of income taxes 1,915 - 1,399 -
-------------------------------------------------------------------------
Balance, end of period 3,150 - 3,150 -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated balance sheets
(in thousands of US dollars)
June 30, December 31, June 30,
2007 2006 2006
(Unaudited) (Audited) (Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $
Assets
Current assets
Cash and cash equivalents 4,603 13,658 10,156
Accounts receivable 131,092 161,612 97,269
Inventories 162,566 140,630 136,159
Income taxes 9,234 9,317 16,329
Future income taxes 8,064 8,354 20,286
Prepaid expenses 11,506 12,025 8,361
-------------------------------------------------------------------------
327,065 345,596 288,560
Property, plant and equipment 48,199 43,213 41,765
Intangible assets 79,149 79,517 72,067
Goodwill 301,988 300,829 317,042
Derivative financial instruments 5,089 - -
Future income taxes 47,210 28,006 -
Deferred charges - 3,281 4,238
-------------------------------------------------------------------------
808,700 800,442 723,672
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current liabilities
Accounts payable and accrued
liabilities 112,229 153,437 117,298
Additional consideration
accrued on business
combination 58,642 57,825 55,712
Derivative financial instruments 535 - -
Current portion of long-term debt 8,861 9,609 9,596
-------------------------------------------------------------------------
180,267 220,871 182,606
Long-term debt 364,279 302,345 293,406
Future income taxes 30,693 27,782 21,929
-------------------------------------------------------------------------
575,239 550,998 497,941
-------------------------------------------------------------------------
Shareholders' equity
Capital stock 237,071 236,088 232,716
Contributed surplus 552 720 1,099
Retained earnings (deficit) (7,312) 12,636 (8,084)
Accumulated other
comprehensive income net of
income taxes 3,150 - -
-------------------------------------------------------------------------
233,461 249,444 225,731
-------------------------------------------------------------------------
808,700 800,442 723,672
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Consolidated statements of cash flows
(in thousands of US dollars)
(Unaudited)
Three-month periods Six-month periods
ended June 30, ended June 30,
2007 2006 2007 2006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
$ $ $ $
Cash flows from operating
activities
Net earnings (loss) 3,962 4,050 (19,948) 4,628
Items not affecting cash and
cash equivalents
Amortization of property,
plant and equipment 3,389 3,133 6,409 6,115
Amortization of intangible
assets 183 81 368 162
Amortization of deferred
financing costs 122 215 292 406
Amortization of deferred
charges - 52 - 125
Stock-based compensation
plans 25 587 (100) 658
Future income taxes (1,606) 4,225 (17,739) 6,661
Gain on disposal of
property, plant and
equipment (20) - (240) -
Loss (gain) on foreign
currency 246 (2,295) 383 (3,584)
-------------------------------------------------------------------------
6,301 10,048 (30,575) 15,171
Changes in non-cash operating
working capital items (45,740) (29,518) (32,215) (1,735)
-------------------------------------------------------------------------
(39,439) (19,470) (62,790) 13,436
-------------------------------------------------------------------------
Cash flows from financing
activities
Repayment of long-term debt (2,330) (2,339) (4,719) (3,953)
Change in revolving credit
facility 45,800 6,000 69,000 6,000
Issuance of capital stock 72 275 774 985
-------------------------------------------------------------------------
43,542 3,936 65,055 3,032
-------------------------------------------------------------------------
Cash flows from investing
activities
Acquisition of property, plant
and equipment (5,540) (4,733) (11,776) (8,433)
Proceeds from disposal of
property, plant and
equipment - 54 798 54
Business combinations - - (342) (17,500)
-------------------------------------------------------------------------
(5,540) (4,679) (11,320) (25,879)
-------------------------------------------------------------------------
Decrease in cash and cash
equivalents (1,437) (20,213) (9,055) (9,411)
Cash and cash equivalents,
beginning of period 6,040 30,369 13,658 19,567
-------------------------------------------------------------------------
Cash and cash equivalents,
end of period 4,603 10,156 4,603 10,156
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Supplementary disclosure of cash
flow information
Interest paid 6,143 5,522 12,531 10,378
Income taxes paid (recovered) 1,908 2,452 (2,094) 13,874